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Financial Accounting
Financial Accounting Unit 8
| Question | Answer |
|---|---|
| What is the purpose of payroll accounting? | To record wages, withhold taxes, and account for employer payroll taxes and benefits. |
| What are the two main types of payroll taxes? | Employee withholdings and employer payroll taxes. |
| What taxes are included in employee withholdings? | FICA (Social Security & Medicare), federal and state income taxes, and voluntary deductions. |
| What taxes are included in employer payroll taxes? | Matching FICA, FUTA (federal unemployment), and SUTA (state unemployment). |
| What is the journal entry to record employee payroll? | Debit: Salaries Expense Credit: FICA Taxes Payable, Federal/State Income Taxes Payable, Salaries Payable |
| What is the journal entry to record employer payroll taxes? | Debit: Payroll Tax Expense Credit: FICA Taxes Payable, FUTA Payable, SUTA Payable |
| What is the journal entry to record payment of payroll liabilities? | Debit: Tax Payable Accounts Credit: Cash |
| What is the journal entry for paying net wages to an employee? | Debit: Salaries Payable Credit: Cash |
| When must wages be recorded under accrual accounting? | When earned, not when paid. |
| What are common components of employee compensation? | Wages, compensated absences, bonuses, stock options, postemployment benefits, pensions. |
| What is the main advantage of earnings-based bonuses? | Motivates employees and aligns their goals with company performance. |
| What is a key risk of earnings-based bonus plans? | Potential for earnings manipulation and short-term focus. |
| What journal entry records payment of federal payroll taxes (FICA, FIT, FUTA)? | Debit: FICA Taxes Payable, Federal Income Taxes Payable, FUTA Payable Credit: Cash |
| What journal entry records payment of state payroll taxes (SIT, SUTA)? | Debit: State Income Taxes Payable, SUTA Payable Credit: Cash |
| What are compensated absences? | Earned benefits like vacation or sick leave that represent a future obligation to the employer. |
| When should the expense for compensated absences be recorded? | When the benefit is earned, not when it is used. |
| What accounting principle supports early recognition of compensated absence expense? | The matching principle. |
| Does the same accounting apply to vacation pay? | Yes, the same method is used for vacation and other types of paid time off. |
| Why is it important to accrue for compensated absences? | Ensures accurate labor cost reporting, aligns with GAAP, and supports financial transparency. |
| What happens to the liability when a compensated absence is used? | The liability is reduced, and cash and taxes are recorded for the actual payment. |
| Who pays sales tax and who remits it to the government? | The customer pays the sales tax; the company collects and remits it to the government. |
| Is sales tax considered revenue for the company? | No. Sales tax is not revenue; it is recorded as a liability. |
| What account is credited when sales tax is collected? | Sales Tax Payable is credited. |
| Journal entry when sales tax is remitted to the government? | Debit: Sales Tax Payable Credit: Cash |
| What are property taxes? | Taxes assessed by local governments on real property like land and buildings. |
| How are property taxes reported in financial statements? | As an operating expense on the income statement. |
| How are prepaid property taxes recorded? | As a Prepaid Property Taxes asset on the balance sheet. |
| How are unpaid property taxes recorded? | As a Property Tax Payable liability. |
| Why is sales tax not recorded as revenue or expense? | Because it’s collected on behalf of the government—not earned or spent by the company. |
| Why does accurate property tax accounting matter? | It ensures expense matching and prevents misstatement of assets or liabilities. |
| What is a contingency in accounting? | A possible gain or loss dependent on a future event. |
| What are common examples of contingencies? | Lawsuits, government investigations, environmental damage, and warranties. |
| What are the two criteria for recording a contingent liability? | The loss is probable and reasonably estimable. |
| What should a company do if a contingency is probable and estimable? | Record a liability Record an expense Disclose in the notes |
| What action is required for a reasonably possible contingency? | No journal entry; disclose in the notes to the financial statements. |
| What action is required for a remote contingency? | No entry and no disclosure required. |
| Are contingent gains recorded before realization? | No, they are only recorded once realized to avoid overstating assets or income. |
| Journal entry for a probable and estimable loss? | Debit: Expense Credit: Liability |
| Define a liability in accounting. | A probable future sacrifice of economic benefits due to a present obligation. |
| Define a contingent liability. | A potential obligation from a past event that depends on a future outcome. |
| Walmart recorded a $283M liability for which case? | The Foreign Corrupt Practices Act (Mexico) case—because the loss was probable and measurable. |
| What is the accounting treatment for the ASDA Equal Value Claims (U.K.)? | Disclosure only – not probable or measurable. |
| What is the accounting treatment for the opioid litigation against Walmart? | Disclosure in notes – no liability recorded unless the loss becomes probable and measurable. |
| Why are contingent liabilities important to financial statement users? | They reveal potential risks and obligations, ensuring transparent and accurate financial reporting. |
| When do you record a contingent liability? | When it’s probable and the amount can be reasonably estimated. |
| What is the time value of money? | The concept that a dollar today is worth more than a dollar in the future due to its earning potential. |
| What is Present Value (PV)? | The current worth of a future sum of money, discounted using an interest rate. |
| What is Future Value (FV)? | The amount a present sum of money will grow to in the future using compound interest. |
| How do you calculate Present Value? | By discounting the future amount using a specific interest rate. |
| How do you calculate Future Value? | By compounding the present amount using an interest rate over time. |
| What is discounting? | The process of converting a future amount into its present value. |
| What is compounding? | The process of earning interest on both the principal and previously earned interest. |
| What does "interest on interest" refer to? | Compounding — earning interest on previous interest as well as the principal. |
| Why is understanding PV and FV important? | It helps in evaluating investments, loans, and long-term financial decisions. |
| What is the relationship between PV and FV? | They are mirror concepts: PV tells what a future amount is worth today; FV tells what today's amount becomes in the future. |
| What is the foundational reason we prefer money now rather than later? | The time value of money — money today has investment and purchasing power. |
| What is a note payable? | A written promise to repay a loan with interest. |
| What is a mortgage payable? | A loan secured by a specific asset, typically real estate. |
| What are the key steps in handling long-term debt? | Choose financing method Issue debt and receive funds Pay interest over time Repay principal at maturity |
| What is an interest-bearing note? | A loan agreement where the borrower pays both interest and principal over time. |
| What is the present value of a note? | The current worth of its future cash payments, discounted at the market rate. |
| When does a note’s face value equal its present value? | When the note’s interest rate matches the market interest rate. |
| What are the two components of each loan payment? | Interest expense and reduction of principal. |
| What is interest expense? | The cost of borrowing money, recorded each period. |
| What does a journal entry for loan interest typically include? | Debit: Interest Expense Credit: Cash |
| What does a journal entry for principal repayment include? | Debit: Notes Payable or Mortgage Payable Credit: Cash |
| What is special about a mortgage payable? | It is backed by collateral, often real estate. |
| In a mortgage, how does the payment structure change over time? | Interest portion decreases, principal portion increases. |
| Why must interest and principal be separated in accounting? | To accurately record interest expense and update the loan liability. |
| What happens if a company fails to make payments on a mortgage? | The lender may claim the collateralized asset. |
| What are the two main types of stock a corporation can issue? | Common stock and preferred stock. |
| What rights do common stockholders typically have? | Voting rights, dividend rights, preemptive rights, and residual claim on assets. |
| What distinguishes preferred stockholders from common stockholders? | Preferred stockholders have priority for dividends and liquidation but usually no voting rights. |
| What is a cumulative preferred dividend? | Unpaid dividends accumulate and must be paid before any common dividends. |
| What is an Initial Public Offering (IPO)? | When a company sells its stock to the public for the first time. |
| What are some benefits of going public via an IPO? | Access to capital, liquidity for shareholders, increased prestige. |
| What are some risks of going public? | Regulatory scrutiny, loss of control, pressure from investors and analysts. |
| What is par value? | A nominal value per share, often symbolic and legally required. |
| What is “Paid-in Capital in Excess of Par”? | The amount shareholders paid over the par value. |
| How is contributed capital calculated? | Par Value + Paid-in Capital in Excess of Par. |
| What value is used when issuing stock for non-cash assets? | Use the fair value of the asset or stock—whichever is more clearly measurable. |
| Why do companies use low par values today? | To minimize legal liability; par is now mostly symbolic. |
| What is treasury stock? | Company stock that has been repurchased and is held by the company. |
| Why might a company repurchase its own stock? | To reduce outstanding shares, potentially increase value, or retain control. |
| How do stock issuances affect the accounting equation? | They increase both assets and equity. |
| What are retained earnings? | Cumulative net income not distributed as dividends; reinvested back into the business. |
| How do retained earnings increase? | Through net income. |
| How do retained earnings decrease? | Through net losses and dividends. |
| True or False: Retained earnings represent a company’s cash balance. | False. Retained earnings are not cash—they are equity. |
| What is the formula for ending retained earnings? | Ending RE = Beginning RE + Net Income – Dividends |
| Where are retained earnings reported? | In the shareholders’ equity section of the balance sheet. |
| Who decides whether to retain earnings or pay dividends? | The board of directors. |
| What are the three primary sources of business financing? | Loans, shareholder investment, and retained earnings. |
| Can a company have high retained earnings and low cash? | Yes. Retained earnings ≠ cash. |
| What does a debit balance in retained earnings usually indicate? | Cumulative losses and poor long-term performance. |
| What type of account is retained earnings? | An equity account. |
| What happens to retained earnings when a company earns income? | Retained earnings increase (credited). |
| What happens to retained earnings when dividends are paid? | Retained earnings decrease (debited). |
| How can retained earnings be used? | To fund operations, purchase assets, or reduce liabilities. |
| Why do retained earnings matter to investors? | They show how much profit is reinvested versus paid out. |
| What are dividends? | Distributions of a corporation’s profits to shareholders. |
| Are dividends recorded as expenses? | No, dividends are not expenses and do not appear on the income statement. |
| Who must approve cash dividends? | The board of directors. |
| What determines the amount of cash dividend a shareholder receives? | Number of shares owned × Dividend per share. |
| Do companies have to pay dividends? | No, dividend payment is optional and based on company strategy. |
| What type of companies typically pay regular dividends? | Mature, stable companies. |
| What type of companies often do not pay dividends? | High-growth companies—they reinvest earnings. |
| What are the three key dates in dividend accounting? | Declaration Date, Date of Record, and Payment Date. |
| What is recorded on the declaration date? | Debit: Dividends (or Retained Earnings) Credit: Dividends Payable |
| What happens on the date of record? | Identifies shareholders eligible for the dividend; no journal entry is made. |
| What is the journal entry on the payment date? | Debit: Dividends Payable Credit: Cash |
| What is the year-end closing entry for dividends (if the Dividends account is used)? | Debit: Retained Earnings Credit: Dividends |
| Do dividends reduce profits or retained earnings? | Retained earnings. |
| What are the types of dividends? | Cash dividends, stock dividends, and property dividends. |
| What is the effect of declaring a dividend? | Increases liabilities and reduces equity. |
Created by:
heavenlypure
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